Bank OverdraftsCompany writes a check for more than the amount in its cash account.

7-7



Generally reported as a current liability.



Offset against other cash accounts only when accounts are with the same bank.

LO 1

ILLUSTRATION 7-2Classiﬁcation of Cash-Related Items

7-8

LO 1

WHAT DO THE NUMBERS MEAN?

WHERE DID I PARK MY CASH?WHAT’S YOUR PRINCIPLE

We have learned that companies report both cash and cash equivalents as cash ontheir balance sheets. But where do they park cash that is not used to pay for inventory,employees, or other expenses? As shown in the chart to the right, companies plow thelargest portion of their cash holdings into corporate debt. As indicated, corporate debt isthe parking place of choice, followed by U.S. Treasury and agency debt. Surveyedcorporate treasurers say that high-grade corporate bonds are preferred because theyare reasonably safe while providing a greater yield premium relative to Treasurys.Seems like a good strategy as long as the corporate issuers can make their payments.However, if the economy takes a downturn, similar to investments in auction-rate notes,these investments may not be true cash equivalents.

The revenue recognition principle indicates that a company should recognize revenuewhen it satisfies its performance obligation by transferring the good or service to thecustomer.

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LO 2

RecognitionRecognitionofofAccountsAccountsReceivablesReceivables

For example, if Lululemon sells a yoga outfit to Jennifer Burian for $100 on account, the yoga outfit istransferred when Jennifer obtains control of this outfit. When this change in control occurs, Lululemonshould recognize an account receivable and sales revenue. Lululemon makes the following entry:

Accounts ReceivableSales Revenue

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100100

LO 2

RecognitionRecognitionofofAccountsAccountsReceivablesReceivables

Some key indicators that Lululemon has transferred and that Jennifer has obtained control of the yogaoutfit.

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1.

Lululemon has the right to payment from the customer.

2.

Lululemon has passed legal title to the customer.

3.

Lululemon has transferred physical possession of the goods.

4.

Lululemon no longer has significant risks and rewards of ownership of the goods.

5.

Jennifer has accepted the asset.

LO 2

RecognitionRecognitionofofAccountsAccountsReceivablesReceivables

Measurement of the Transaction PriceThe transaction price is the amount of consideration that a company expects to receive from a customerin exchange for transferring goods or services.

Variable ConsiderationIn some cases the price of a good or service is dependent on future events. These future events ofteninclude such items as discounts, returns and allowances, rebates, and performance bonuses.

Illustration: On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 withterms of 2/10, n/60, f.o.b. shipping point. On June 12, the company received a check for the balance due from ArquetteCompany. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records salesusing the gross method.

June 3

Accounts Receivable

2,000

Sales

June 12

Cash ($2,0002,000 x 98%)Sales DiscountsAccounts Receivable

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1,960402,000LO 2

Cash Discounts (Sales Discounts)

Illustration: On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 withterms of 2/10, n/60, f.o.b. shipping point. On June 12, the company received a check for the balance due from ArquetteCompany. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records salesusing the net method.

June 3

Accounts Receivable

1,960

Sales

June 12

Cash ($2,0001,960 x 98%)Accounts Receivable

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1,9601,960

LO 2

Cash Discounts (Sales Discounts)

Illustration: On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 withterms of 2/10, n/60, f.o.b. shipping point. Prepare the journal entries on Bolton Company books to record the saleassuming Bolton records sales using the net method, and Arquette did not remit payment until July 29.

June 3

Accounts Receivable

1,960

Sales

June 29

Cash 2,0001,960Accounts ReceivableSales Discounts Forfeited

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1,96040LO 2

RecognitionRecognitionofofAccountsAccountsReceivablesReceivables

Sales Returns and Allowances



Sales Returns and Allowances is a contra revenue account to Sales Revenue.



Allowance for Sales Returns and Allowances is a contra asset account to Accounts Receivable.



The use of both Sales Returns and Allowances, and Allowance for Sales Return and Allowancesaccounts is helpful to identify potential problems associated with inferior merchandise,inefficiencies in filling orders, or delivery or shipment mistakes.

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LO 2

SalesSalesReturnsReturnsandandAllowancesAllowances

Illustration: Assume that Max Glass sells $5,000 of hurricane glass to Oliver Builders on account. Max Glassestimates that $400 of these glass sales will either be returned or an allowance will be granted. Max Glass recordsthe sale on account and records an allowance for sales returns and allowances as follows.